Relative Strength Index (RSI) is a momentum indicator.

RSI is price related and it is used as an overbought and oversold oscillator.

The value of RSI is always a number between 0 and +100.

A lower value indicates a more oversold market, while a higher number indicates a more overbought market.

As we can see here, RSI has never reached 0 or +100.

Therefore most traders regard RSI in the 70 to 80 area's as an indication of an overbought market.
This means we liquidate when RSI reaches 70 to 80.

Likewise traders regard RSI values in the 20 to 30 areas as an indication of an oversold market.

This means we buy in the 20 to 30 area's.

It is highly recommended to wait until a turn in RSI is observed and a change in the price direction has appeared before taking an action.

We must also remember that overbought and oversold indicators can stay overbought or oversold for a while, and the security can become more overbought or oversold.

Here we see a security at overbought levels but the price continues to rise.

Selling at the first overbought signal would have led to lost profit here.

Relative price index can also be used as a leading indicator by observing possible divergence between RSI and the price of the security.

If the price makes new highs without making new highs in RSI, we can anticipate the price will go down.

Here we see a bearish divergence.

If the price makes new highs but without making new highs in RSI a bullish divergence has occurred and we must anticipate the price will go up.

Observe the bullish divergence here.

Another way to use the RSI indicator is looking for chart formations.

Sometimes we see clearer chart formations on RSI than on the price charts themselves.

Here we see a double top chart formation in RSI, however we cant clearly see the formation in the price chart.

Observe the drop in the price after the formation.

RSI can also be used in relation to support and resistance lines.

The support lines in RSI show when the price should change directions.

A breakout should be interpreted conventionally.

We see here that RSI turns down each time it reaches 40 and turns down each time it reaches 70.

Here a break occurs and the price moves in the direction of the breakout.